Accounting Exam Questions and Solutions

Question 1 - End-of-Period Adjustments and Financial Statements

Q1 A- Farah Youssef operates as a sole trader. Below is a trial balance extracted from her books as at 31 December 2020. Additional information is provided for use in preparing the company’s adjustments:

1The value of closing inventory is £102,500.

2On December 1, Farah Company borrowed £100,000, at 6% annual interest, from the National Bank. Farah Company has 120 days before the first payment is required.

3Farah has paid her rent until 31 March 2021. Her annual rent is £24,000.

4Office equipment has a useful life of ten years and a residual value of £0. It is to be depreciated on a straight-line basis.

5The motor vehicle with a useful life of ten years and an estimated residual value of £30,000 is to be depreciated on a straight-line basis at a rate of 10%.

6Farah finds that receivables of £10,000 need to be written off as irrecoverable.

7The allowance for receivables is to be set at ten per cent of the remaining outstanding receivables as at 31 December 2020.

8The heating bill will arrive on 5 January and about £1,000 is expected to relate to the period until 31 December.

1.Make the end-of-period adjustments entries.

2.Prepare Farah’s income statement for the year ended December 31, 2020.

3.Prepare Farah’s balance sheet as at December 31, 2020.

4.How do the adjusting entries differ from other journal entries?? Explain why adjusting entries are needed.

B- The following transactions occurred in ABC Company:

1.The accrued salaries at December 31,2020 amounted to $490, The accountant made an adjusting entry by debiting salaries expense $940 and crediting Accrues Salaried $940.

2.The accountant recorded $900 Depreciation Expense on store equipment as follows:

Dr.  Depreciation Expense 900
Cr.  Cash    900 

Show the effect of each entry on the financial statements separately. (Correcting entries are not required).                                       

C- The following information pertains to Nour Company:

1- Equipment was purchased on September 1, 2014 for $210,000. It is estimated salvage value is $30,000 and it is estimated useful

life is 5 years. After the 5 years the equipment was sold for $30,000.

2- Building was purchased on January 1, 2018 for $300,000. It is useful life is 20 years and depreciated on a reducing balance rate of 10%.

Question 2 - CVP Analysis and Cost Classification

3- On March 31,2019 ABC, Inc. paid Nour Publishing Company $15,840 for a 3-year subscription for five different magazines. The subscriptions started immediately. The payment was recorded by Nour company to the Revenue account.

4- On December 31, 2019 the balance of Receivables was $165,000 and the balance of Allowance of irrecoverable receivables was $21,000. Before adjusting the accounts, Nour finds that receivables of $15,000 need to be written off as irrecoverable, and the allowance for receivables is to be set at ten percent of the remaining outstanding receivables as at 31 December 2019.

1- Prepare the necessary adjusting entries at December 31, 2019. Show your calculations.

2- Prepare a partial income statement and a partial balance sheet for the year ended December 31,2019 to show the effect of the adjusting entries on these statements (Show you computations and explanation)

Question 2 (30 marks)

A- Farah Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product which it sells at $132.7 per unit.

Using high-low method and CVP analysis

1. Compute Farah’s breakeven point in units and dollars. Prove your answer 

2. Compute how many units the company needs to sell to earn a profit of $ 600,000. 

3. Compute the selling price per unit of the company if BEP (units) is 40,000 units and the variable cost per unit and total fixed cost does not change. 

4. Explain the various methods used to estimate the variable component and the fixed component of the   mixed cost (Excluding Scattergraph method) and state which method is the most accurate? Why?

B- You were given the following information related to AAA Company, the exclusive distributor for an automotive product:

Direct labor cost represents 30% of its total conversion cost and 40% of its total prime cost. 

The only variable selling and administrative expense is a sales commission of 5% of sales. 

The company maintains no beginning or ending inventories and its manufacturing overhead costs are entirely fixed costs.

Calculate the following:

1. The total manufacturing overhead cost.

2. The total direct materials cost.

3. The total manufacturing cost.

4. The total variable selling and administrative cost.

5. The total variable cost.

6. The total fixed cost.

7. The total contribution margin.
 

C- “The traditional income statement format arranges the data in a way that allows management to more easily analyze how changes in production and sales will influence operating profit’’ Discuss the accuracy of this statement.

Question 3 (30 marks)

A- The following details relate to AAA Company that produces three products:

A particular machine is the bottleneck. On that machine, 3 machine hours are required to produce each unit of Product X, 2 hours is required to produce each unit of Product Y, and 2 hours are required to produce each unit of Product Z.

Which model should AAA emphasize? Why? (Show your calculations).

B XYZ Company manufactures and sell wooden product. It wants to prepare cash budget for the second quarter of the year. The company’s sales budget for the second quarter given below:

Credit sales are collected as follows:

25% in the same month of sale

65% in the month following sale

10% in the second month following sale 

February sales totaled $400,000, and March sales totaled $430,000.

1 Prepare the cash collection schedule for the second quarter.

2. What is the accounts receivable balance on June 30th?

C- ABC Corporation has estimated the following information for first quarter of 2020 for one of its products:

The ending inventory at December 2019 was 28,000 units.

Prepare the Production Budget and the Sales Budget for the first quarter of 2020, assuming selling price per unit is $20.

D- The following information have been taken from a manufacturing company for the year 2020:

Calculate cost of goods sold and gross profit for the year ended December 31, 2020.